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Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about Puxin Limited (NYSE:NEW).
Is Puxin Limited (NYSE:NEW) the right investment to pursue these days? Hedge funds are becoming hopeful. The number of long hedge fund positions advanced by 2 in recent months. Our calculations also showed that NEW isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). NEW was in 5 hedge funds' portfolios at the end of September. There were 3 hedge funds in our database with NEW holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
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Israel Englander of Millennium Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to take a peek at the recent hedge fund action encompassing Puxin Limited (NYSE:NEW).
Hedge fund activity in Puxin Limited (NYSE:NEW)
At Q3's end, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 67% from the second quarter of 2019. By comparison, 5 hedge funds held shares or bullish call options in NEW a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Serenity Capital was the largest shareholder of Puxin Limited (NYSE:NEW), with a stake worth $5.4 million reported as of the end of September. Trailing Serenity Capital was Hillhouse Capital Management, which amassed a stake valued at $1 million. Millennium Management, Citadel Investment Group, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Serenity Capital allocated the biggest weight to Puxin Limited (NYSE:NEW), around 1.25% of its 13F portfolio. Hillhouse Capital Management is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to NEW.
As aggregate interest increased, some big names have jumped into Puxin Limited (NYSE:NEW) headfirst. Hillhouse Capital Management, managed by Lei Zhang, initiated the most valuable position in Puxin Limited (NYSE:NEW). Hillhouse Capital Management had $1 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $0.2 million position during the quarter.
Let's now review hedge fund activity in other stocks similar to Puxin Limited (NYSE:NEW). These stocks are Cooper-Standard Holdings Inc (NYSE:CPS), Kimbell Royalty Partners (NYSE:KRP), AngioDynamics, Inc. (NASDAQ:ANGO), and INMODE LTD. (NASDAQ:INMD). This group of stocks' market valuations are similar to NEW's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CPS,16,33640,1 KRP,5,15303,0 ANGO,15,34646,3 INMD,7,24136,7 Average,10.75,26931,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $27 million. That figure was $7 million in NEW's case. Cooper-Standard Holdings Inc (NYSE:CPS) is the most popular stock in this table. On the other hand Kimbell Royalty Partners (NYSE:KRP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Puxin Limited (NYSE:NEW) is even less popular than KRP. Hedge funds clearly dropped the ball on NEW as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on NEW as the stock returned 20.1% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.